The Koch Brothers' Best Investment

Charles Koch speaks in his office at Koch Industries in Wichita, Kansas.

This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here.

The sprawling political network backed by billionaire brothers Charles and David Koch will spend $20 million ahead of the midterm elections to convince voters that the Trump tax cuts are good for the country and the middle class. That’s on top of the $20 million they spent to promote the 2017 Republican tax bill’s passage. All told, the network plans to spend $400 million on candidates and issues this election cycle, up from $250 million in the last one.

Most of the money will be spent on TV ads targeting vulnerable Democratic senators for opposing the tax cuts. As of early May, the Koch network’s political advocacy arm, Americans for Prosperity (AFP), had already run more than 8,000 ads targeting Democratic Senators Heidi Heitkamp of North Dakota, Joe Donnelly of Indiana, and Claire McCaskill of Missouri.

The campaign also includes door-to-door canvassing, in which AFP employees and volunteers talk up the new tax law with voters. AFP is calling the campaign the “American Pay Raise.” Of course, if you have to spend tens of millions of dollars to convince working families that tax cuts are good for them, that should tell you there’s something fundamentally wrong with your tax cuts, which go mostly to corporations and the rich.

Nobody better personifies this tilt better than the Koch brothers themselves. The immense amounts shelled out by the Koch network to pass and promote the GOP tax law are just drops in the bucket compared with the tax windfall the Koch brothers will reap from the new law.

Americans for Tax Fairness estimates that the Kochs and their conglomerate Koch Industries will likely save between $840 million and $1.4 billion in income taxes each year. That’s a return on investment of at least 4,100 percent on the $20 million they spent to pass the law.

Estimating the potential tax savings for the Koch brothers is not an exact science. Koch Industries, the nation’s second-largest private corporation, does not publicly reveal its financial statements or how its individual companies are structured for tax purposes. Some may be C corporations, which would benefit from the lower corporate tax rate. Others are likely pass-through entities, so their tax savings would flow directly through to the individual tax returns of their owners, primarily Charles and David Koch.

Koch Industries brought in about $100 billion in revenue last year, according to Forbes. Assuming the conglomerate has a (relatively modest) pretax profit margin of 10 percent, Koch Industries’ profits would be around $10 billion before taxes. Let’s say that all the Koch companies are organized as pass-through entities, so all the income is taxed at the individual level. Let’s further assume that these profits are divided equally between the two brothers, so each reports $5 billion of business income. Under the new law, the Kochs will be able to deduct 20 percent of that income, so each will have $1 billion in tax-free income.

The tax law also reduced the top income tax bracket—which now applies to income over $600,000 for a married couple—from 39.6 percent to 37 percent. Under the new law, Charles and David Koch could pay about $1.5 billion in taxes each on their business income, versus the nearly $2 billion they would have owed under previous law. These two provisions alone could save them about $500 million each, or $1 billion in total.

To be fair, each brother owns a 42 percent stake in the business, so 16 percent of the profits will pass through to the other owners. Assuming that each brother reports 42 percent of the $10 billion in estimated profits doesn’t significantly change the magnitude of the estimated tax savings—each brother would still get about $420 million.

If we instead assume that all the Koch companies are taxed at the corporate level, the tax savings for Koch Industries could be up to $1.4 billion. This assumes that the Koch companies previously paid the statutory 35 percent corporate tax rate, in which case Koch industries would have owed $3.5 billion in taxes on its $10 billion in profits. Under the new law, it would only owe 21 percent, or $2.1 billion.

Most corporations pay less than the statutory rate due to myriad tax loopholes. Koch Industries could have already paid a low effective tax rate under prior law, meaning its benefit from the tax law would be less than estimated here—especially if loopholes that it relied on were closed. Even so, the lower rates in the new law will save them a bundle. And luckily for Koch Industries, which has substantial oil and gas operations, most of the loopholes for this industry remain wide open.

The propaganda for the Republican Tax Act portrays it as good for investment. It’s hard to find an investment in the real economy that paid off as handsomely as the Koch brothers’ political spending.

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